Interfacing Macro and Micro Simulation of Economic Activity

This is a collaborative wiki space for collaborators on a research initiative to create a new approach to modeling the interactions between the macroeconomy of metropolitan regions and the competition between them; and the intra-metropolital spatial-temporal dynamics of firms.

Participants

Motivations

The motivations for this research are:

• To be able to model the dynamic adjustments in the levels of economic activity between metropolitan levels that result from large-scale policies or changes in underlying factors that change competitive positions, such as housing prices, wages, or levels of traffic congestion. An example would be if land use regulatory constraints force up housing prices substantially within a metropolitan area, then some households may choose to relocate to less expensive housing outside the metropolitan area, and make very long commutes to jobs within the metropolitan core.

• To be able to analyze in an integrated and consistent way the intra-urban changes in businesses that arise due to changes in the rate of growth (or decline) of aggregate levels of economic activity within and between sectors at the metropolitan level; these micro changes include:
  • Birth and death of firms
  • Expansion and contraction of firms (number of employees)
  • Relocation of firms (possibly due to expansion or contraction)

• To be able to analyze the general equilibrium dynamic interactions between supply and demand and prices for labor within each sector, and across and within metropolitan areas.

• To be able to analyze the general equilibrium dynamic interactions between supply and demand and prices of housing and nonresidential space, across and within metropolitan areas.

Alternative Approaches

Some of the methodological approaches to developing an integrated macro-micro model of economic activity that would be appropriate to explore within this collaboration include:

• Combining a Computable General Equilibrium (CGE) model in a sequential way with UrbanSim? business demography and location choice models. The CGE provides control totals for UrbanSim? only. This is loose coupling and no or little feedback from UrbanSim? to CGE.

• Integrating a CGE with a Microsimulation approach by substituting a sample or the whole population of firms for the representative agents within CGE models.

• Adding model components and behavior into UrbanSim? to attempt to capture the key theoretical elements from CGE, but in a full microsimulation (bottom-up) implementation. There would be no CGE model per-se, but UrbanSim? would include more behavioral elements that are motivated by CGE or GE theory.

• • One example of this approach might be a nested set of location models: Businesses choose metropolitan area at the top level, and then conditioned on this, choose detailed locations (zones or employment clusters).

• Using Dynamic Stochastic General Equilibrium (DSGE) to simulate macro relationships; either sequentially using microsimulation or alternatively a tighter integration

Some Readings

See the readings attached or linked below for some background on these topics.

CGE Methods

• Prof. Ghadimi's Course on CGE
• Berkeley Energy And Resources (BEAR) Model
• Introduction to CGE and SCGE Modelling: Lecture Notes
• Introduction: The Theory of General Equilibrium Model

Linking CGE and Microsimulation

• CGE Modeling and Microsimulation: A Survey
• Combining Microsimulation with CGE and Macro Modelling for Distributional Analysis in Developing and Transition Countries
• The benefits of linking CGE and Microsimulation Models - Evidence from a Flat Tax analysis

Dynamic Stochastic General Equilibrium Models (DSGE)

• DSGE models and central banks
• A Dynamic Model of Aggregate Demand and Aggregate Supply

Software

• Dynare
• GAMS
• RELU-TRAN

-- PaulWaddell - 18 Aug 2011